Should India Defer The New Revenue Standard?

India Inc. is getting ready to adopt the new IFRS converged Ind-AS beginning April 1, 2016. However, it is now faced with an important debate – whether India should defer the new standard on revenue recognition i.e. Ind-AS 115 or continue to be the first to adopt it globally? One of the key reasons of this debate is the recent decisions of the global standard setters the IASB and the FASB to defer the mandatory effective date of the equivalent revenue standard to January 1, 2018.

The NACAS is expected to take up this issue on August 5 to decide the fate of this new revenue standard in context of Ind-AS adoption.

Some of the reasons often cited to defer this new revenue standard in India include 1) extensive disclosure requirements of Ind-AS 115 which in turn will require significant changes to the IT systems2) complexity and judgment involved in identifying, measuring and recognizing revenue for separate performance obligations in a bundled arrangement3) additional time and effort required in understanding and implementing the voluminous details of the new standard, and 4) is there a need for India to be the first to adopt this, especially when both IASB and FASB have decided to defer this for another year and are proposing changes to the existing standard.

Others believe that India should not defer this standard so that companies are provided a stable platform and thereby avoid disruption. This means, if India does not adopt the new Ind-AS 115 on revenue recognition, then companies will have to move from current Indian GAAP to Ind-AS 18 (the existing revenue standard under IFRS) and then again within a period of 2-3 years move to Ind-AS 115. Surely, this will involve multiple transitions accompanied by efforts and cost which is also not desirable.

May be the answer lies somewhere in the middle. If one studies the amendments which are being proposed by the IASB forming the basis for the deferral of the corresponding IFRS standard, they appear to be targeted and more in the nature of clarifications/additional guidance in the areas of identifying multiple performance obligations, determination of gross or net presentation of revenue (i.e. principal vs. agent) and arrangements involving licensing of IP. These amendments do not result in any fundamental changes in the rule making or principles underlying the new revenue standard. Accordingly, this by itself should not be the only basis for deferring the new revenue standard in India. Such clarifications/implementation guidance can be very easily provided by the ICAI. It is important to note that even if India does not adopt Ind-AS 115, and instead decides to adopt Ind-AS 18 including its various interpretations, the transition from Indian GAAP to Ind-AS will still require significant and similar effort.

In my view NACAS could consider the following 2 options – Not to defer the new revenue standard Ind-AS 115, instead include the IASB’s limited amendments in the form of implementation guidance or clarifications. This approach derives support from the fact that IASB has not proposed any fundamental changes and therefore not much has really changed from the first time when the MCA notified Ind-AS in February 2015 - thereby providing the desired stable platform and avoiding 2 transitions. Alternatively, companies could be given an option to either adopt Ind-AS 18 including its interpretations or Ind-AS 115 consistent with the early adoption option retained under IFRS. This will enable companies to decide for themselves after thoroughly analyzing the implications of both Ind-AS 115 and Ind-AS 18, as to which revenue standard they would prefer to adopt – thereby also continuing to remain converged with IFRS and providing certain companies the necessary relief they are seeking. This option will also be useful for entities that expect to be ready to implement Ind-AS 115 on its original effective date.